The
Silver Lining to a Falling Dollar
Despite the U.S. national debt, there is a silver lining for income
investors. This massive spending, combined with movement out of U.S.
Treasuries, is going to take its toll on the dollar, and
international income investors could reap the rewards in the form of
higher dividends.

Year-to-date through January 15th, the Leisure
Gaming/Equipment Index has gained +5.4% compared with a gain of just
+2.5% for the S&P 500. Last year, the gaming index soared +50.7%,
trouncing the S&P's +26.4% gain.

Gaming Industry Fundamentals
The gaming industry is estimated to be a $60-billion-dollar a year
business. It includes casino operations, state lotteries, pari-mutuel
wagering, charitable gaming and gaming-equipment manufacturing. Half of
all gaming revenues come from casino winnings. The other half comes from
entertainment, hotel rooms and restaurants. About 65% of gaming revenues
come from slot machines, which are preprogrammed to pay out certain
amounts. According to industry experts, gaming generates more revenue
than spectator sports, recorded music, theme parks, and cruises
combined.

What's Fueling Growth in the $60-Billion Industry?
Gaming companies continue to aggressively expand in both new and
existing markets. Whereas only Nevada and New Jersey allowed gambling 14
years ago, casino gambling is now legal in more than 20 states. The
geographic expansion of casinos and lotteries has been fueled by a
desire on the part of state governments to create jobs, boost tourism
and generate more tax dollars. Also assisting the expansion is the
federal government's passage of legislation that allows Native Americans
to own or operate casinos in various states.

According to a recent study, there are an estimated 51
million-plus casino gamblers in the U.S. As a group, these gamblers make
about 300 million trips to casinos each year. About a quarter of the
adult population has gambled at a casino at least once in the past 12
months. State lotteries have also helped boost interest in gambling.
Lotteries are now conducted in more than 30 states.

The aging and growing Baby Boomer generation continues
to spend money on leisure activities such as gambling. This demographic
alone could provide a solid long-term foundation for revenue growth, as
the number of people over the age of 55 is projected to double over the
next 25 years. This older generation tends to have more free time and
more disposable income to gamble with.

Another trend that seems to be picking up in the
gaming industry is the development of "racinos." Racinos
involve a combination of racetracks with slot machines. Many states --
including Massachusetts, Maryland, and Maine -- are now considering
allowing racetracks to develop gaming rooms with slot machines on the
premises. Gambling equipment makers could see a surge in business in the
coming years thanks to new demand for slot machines from racinos.

In addition to adding new jobs to the local economy,
casino gambling is recognized as a means of stimulating state economies
through the addition of new tax revenues. It's that recognition that has
spurred the expansion of gambling throughout the country. Meanwhile,
international markets could also provide a huge catalyst for future
industry growth. For example, the U.K. is considering deregulating the
use of slot machines. Only a few thousand slots are in use there now,
but with less regulation, the long-term potential in that market could
be enormous. And finally, gaming equipment makers are constantly working
to create new slot machines and other games. The introduction of popular
new slot machines, as well as cashless machines (more on these below),
should also fuel industry growth in the coming years.

Industry Risks
Two negatives stand in the way of gaming industry growth. First, gaming
requires legislative approval, which is often slow in coming. Secondly,
governments often look to gaming as a source of tax increases -- the old
sin tax -- which cuts into casino profits. For example, when Illinois
recently raised its top tax rate to 50% on gaming profits, the whole
industry took it on the chin.

Another vulnerability of the industry was brought to
light after the September 11th terrorist attacks. Prior to the attacks,
the industry had posted solid revenue growth for more than 30
consecutive years amidst all types of economies. However, the terrorist
attacks back in 2001 limited consumer travel and put a damper on casino
revenues the following year. On the positive side of things though, the
attacks also demonstrated the resiliency and strength of the industry,
as most companies managed to bounce back fairly quickly.

LEISURE-GAMING COMPANIES

Favored Sector Pick: International Game
Technology (IGT, $35.64)International Game Technology (IGT, $35.64) is our favored pick in
the leisure-gaming industry. IGT develops, manufactures and distributes
video-based cash and cashless gaming machines, including slot and video
poker machines. With the rapid expansion of gaming across the country,
IGT will continue to benefit from sales of gaming equipment to new and
existing casinos. In addition, the company stands to benefit even more
from the trend to convert existing coin-operated slots to
"cashless," or EZPay, machines. Both developments signal the
likelihood of many more years of ample growth for the slot machine
maker.

Casino operators like cashless slots because the
machines improve company margins by reducing operating expenses. As
anyone who regularly plays the one-armed bandits well knows, slot
players ordinarily need a steady supply of coins to keep gambling. To
meet this need, workers have to keep supplying change and stocking the
machines with coins. However, cashless machines can save as much as 30%
on labor costs, according to industry experts.

Currently, about 30% of the industry's installed base
of slot machines have been converted to the new cashless format. That
leaves plenty of room for IGT to benefit from future conversions. North
America is currently home to about 700,000 slot machines, and IGT
estimates that roughly 400,000 of those are prime candidates for
replacement with cashless machines. Along those lines, IGT has already
signed contracts with Caesars Entertainment (CZR, $12.00), MGM Mirage
(MGG, $40.00) and Harrah's Entertainment (HET, $52.37) to retrofit or
replace thousands of machines over the next several years. Last year,
Station Casinos (STN, $32.93) agreed to buy 8,000 EZ pay or cashless
gaming machines over a three-year period.

According to the American Game Association, IGT
manufactures and sells roughly 70% of all slot machines sold in the
United States, giving the firm a commanding lead in the slot machine
market. Company growth has also been impressive, as sales have climbed
from $930 million in 1999 to over $2.1 billion last year. In addition,
sales of slot machines aren't IGT's only source of revenue. The firm has
also had some success leasing its machines to casinos in exchange for a
percentage of the daily win. The company also derives about 25% of its
sales from international markets, and as we mentioned before, growth
opportunities in overseas are enormous.

Acquisition Strategy
In October, IGT bought Acres Gaming, a maker of sophisticated gaming
software that tracks which games customers play and how they play them.
The software has greatly enhanced IGT's marketing efforts. The company
uses the information it gathers to keep the casino's customers loyal in
much the same way that airlines use frequent-flier miles. Casino players
accumulate points at IGT's machines and get bonuses for sticking with
the establishment.

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IGT also bought Anchor in December 2001 to gain
control over the firm's blockbuster "Wheel of Fortune" game,
as well as other popular titles such as "The Price Is Right"
and "Jeopardy." The acquisition also gave IGT inroads into the
lottery business. The firm now makes the machines for games like
PowerBall and Mega Millions, which provide IGT with about 6% of its
revenue.

Growth Prospects and Valuation
IGT is currently trading at 28 times this year's consensus earnings
estimate of $1.28 per share. On average, analysts expect the company's
profits to grow at a 15% annual clip over the next five years. We don't
consider that to be much of a gamble for growth investors, so we've
decided to add IGT to our "Watch List" for our new short-term
portfolio (we'll bring you a table and analysis of all of our watch list
holdings in our next issue).

GTECH Holdings (GTK, $54.60)
GTECH is the world's largest supplier of computerized online lottery
products and services. The company has contracts with 25 of the 39
lotteries in the United States and 59 of 105 international lotteries.

Harrah's Entertainment (HET, $52.37)
Harrah's owns and operates casino/resorts and riverboats under the
Harrah's, Showboat and Rio brand names. One of the most geographically
diverse casino operators, the firm's locations are spread throughout
Nevada, New Jersey and ten other states.

Mandalay Resort Group (MBG, $46.93)
Mandalay owns a variety of casino/resorts located primarily in Nevada.
The firm's casinos include Mandalay Bay, Excalibur, Luxor and Circus
Circus in Las Vegas. It also owns the dockside casino in Tunica,
Mississippi and a casino in Detroit. Mandalay also jointly owns Monte
Carlo in Las Vegas, the Silver Legacy in Reno and the Grand Victoria
riverboat in Illinois.

MGM Mirage (MGG, $40.00)
MGM owns the MGM Grand Hotel/Casino in Las Vegas, a 5,000-room hotel and
a movie-related theme park. It also owns the MGM Grand Diamond Beach
Hotel/Casino in Australia. MGM also owns the New York-New York Casino in
Las Vegas.

Please Note: The above article was merely a
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